Potential Duplex Investment

[Gary F.]

I'll be the first to admit, I'm a total newbie at REI. I've been trying to educate myself as much as possible reading the many posts here on BP.

My situation:

I have a plenty of equity on my current home. I currently have a $250k HELOC at 4% fixed/5 yrs.

Potential property:

Asking price $250

Sacramento, CA. Low income area

Duplex, 7200sf lot. Two freestanding small houses on one long parcel.

Claimed rental history ~$2000/month:

Unit 1: $1300. 

4/2. 1300sf. Carport. Hardwood floors. W/D in unit.

Unit 2: $700

2/1. Carport

The selling agent says both units are currently rented with non-Section 8 but they have done Section 8 in the past. One long term renter (5 yrs) and one moving on next week.

He says current owner is an older investor. Online research shows the current owner may have paid approx. $120k for the property back in 2011. He would do quite well if he gets his $250k asking price. CA is hot right now, so they could potentially get more than asking also giving this property's unique 2 separate houses setup vs. a shared wall. Of course, I've no idea if we're in a bubble and the market will go down in the coming months/years. On the downside, it's in Sacramento in a less than stellar neighborhood. Almost a "ghetto" maybe.

I could potentially pay full cash asking price if property was really worth the price.  But even the selling agent advised against that stating it's better to put down 25% and mortgage the balance. I'm still not fully understanding the advantage of that since I'd still have to pay that loan as well.

Please share thoughts....Thanks.

[Derek Jones]

You mention it's in the ghetto; that's a possible headache. Might be a reason why they are selling. I don't know their motivation but if they bought it for $120k they are cash flowing roughly $1300/m which looks great on paper.

As far as all cash or finance...

If you pay all cash that's $2000/m cash flow and you own 1 property.

If you finance with 25% down that's roughly $700/m cash flow with 1 property.  If you can manage to do that 3 more times that's $2800/m cash flow and you own 4 properties.

If this is the property I think it is, rents are actually listed as $795/$1395 and you'd also want to set aside some money for repairs.